On the Aug. 23, 2016, the Eleventh Circuit of the U.S. Court of Appeals handed down its decision in Sergeeva v Tripleton International Limited. In my view the case demands attention from every IFC service provider who has a physical nexus such as a full service or representative office on U.S. soil, as well as clients who use service providers with either of these operations.

The substance of the decision is that it upheld a lower court’s judgment which imposed a sanction of US$234,983 plus US$500 per day in contempt for any future non-compliance up to sixty days on the U.S. office of an international corporate and trust service provider with offices globally, including some in the IFC world. It also made it clear that a U.S. court has jurisdiction to order the production of documents to it, whether or not said documents were needed for a U.S. action or a foreign proceeding. It also decided that this is also the case whether or not the documents were within the physical jurisdiction of the U.S. as long as the person before the U.S. court had control over them. The decision shows the dangers that service providers face when they have U.S. operations as well as the risks clients incur by using these service providers with strong U.S. nexuses.

This article will examine the decision and comment on it both from a legal and practical point of view.

Background

The story begins in Moscow, Russia, where Mikhail Leopoldovich Dubin and his ex-wife Anna Aleksandrovna Sergeeva, having dissolved their 16-year marriage, began a distinct proceeding for the division of marital assets. Anna claimed that Mikhail was concealing and dissipating the marital assets through and with the assistance of offshore companies around the world. In its decision, the Eleventh Circuit comprised of Circuit Judges Jordan and Anderson and District Judge Dalton, who wrote the decision, noted in quite colorful language that: “Ex-Husband [Mikhail] dodged, delayed and opposed Ex-Wife’s [Anna’s] unrelenting efforts to obtain discovery in support of her claim, and their red in tooth and claw feud played out in countries around the world, including Cyprus, Latvia, Switzerland, the British Virgin Islands (“BVI”), the Commonwealth of the Bahamas (“Bahamas”) and the United States of America.”

In the U.S., Anna sought information from Gabriella Pugh and her employer Trident Corporate Services, Inc (Trident Atlanta) in Atlanta, Georgia. She expected that this would reveal Mikhail’s beneficial ownership of Tripleton International Limited (Tripleton), a corporation domiciled in the Bahamas. Trident Atlanta resisted the information request and Anna filed a 28 U.S.C. section 1782 action (an ex-parte application for judicial assistance) in the Atlanta division of the District Court on the July 25, 2013. The magistrate judge granted the application and authorized service of two subpoenas.

The subpoena issued to Trident Atlanta referenced Tripleton and other Bahamian corporations and Trident’s corporate services office in the Bahamas. It also demanded the production of documents possessed by Trident Bahamas and other Trident offices in Cyprus and Switzerland. It specifically instructed Trident Atlanta to furnish all responsive documents in its possession, “custody or control, regardless of whether such documents or materials are possessed directly by [Trident Atlanta] or by any of [Trident Atlanta’s] agents, representatives, attorneys, or their employees or investigators.”

Trident Atlanta objected to the subpoena on numerous grounds, including that it sought documents located outside the United States and required it to obtain documents from a third party. Trident Atlanta also filed motions to vacate the ex-parte order and to quash the subpoena, which motions were referred to the magistrate judge. The latter denied these motions and granted Anna’s motion to compel. The magistrate judge also required production of all documents responsive to the subpoena that were within the “possession, custody, or control” of Trident Atlanta. A few months later, the magistrate judge also denied Trident Atlanta’s request for reconsideration of the production order (reconsideration order).

Eventually, Trident Atlanta produced only 23 pages of documents from its office and it objected to the production and reconsideration orders. On the Feb. 6, 2015, the District Court judge overruled Trident Atlanta’s objections and approved the orders entered by the magistrate judge (review order). Several months later, the District Court declined to reconsider the review order and noted that Trident Atlanta’s obligation to respond to the subpoena was clear: “[Trident Atlanta] is required to respond to the [S]ubpoena as ordered by [the Magistrate Judge] on Nov. 22, 2013. If it does not have the requested documents, it should say so via a discovery response with a clear statement as to what [Trident Atlanta] has done in order to obtain these documents. If [Trident Atlanta] cannot produce the documents after a good faith attempt to find documents, it should say so. Obviously, if [Trident Atlanta] does not tell the truth and does in fact have the practical ability to obtain the documents, this Court will order sanctions against [Trident Atlanta] (DJ Reconsideration Order).”

Trident Atlanta then filed the first appeal and requested stays, which requests were denied by the District Court and by the Eleventh Circuit Court.

While the first appeal was pending, Anna sought sanctions against Trident Atlanta for its failure to produce documents in response to the subpoena (sanctions motion). The District Court determined that it retained jurisdiction concerning the sanctions issue. It accepted additional evidence and briefing, and conducted an evidentiary hearing on the Oct. 6, 2015.

After said hearing, it granted the sanctions motion and held Trident Atlanta in contempt. The court also awarded Anna her attorney’s fees and costs (compensatory sanction), and ordered Trident Atlanta to produce responsive documents or pay a sanction (coercive sanction) of $500 a day for up to 60 days of any continued non-compliance (contempt order).

In January 2016, the District Court rejected Trident Atlanta’s request for relief from the coercive sanction and entered a partial final judgment awarding $234,983.58 to Anna as the compensatory sanction. Trident Atlanta filed its second appeal, and after consolidating the first and second appeals, the Eleventh Circuit heard oral arguments on the March 9, 2016, and rendered its decision in August 2016.

The Court’s legal analysis and decision

With regards to the first appeal dealing with Trident Atlanta’s need to respond to the subpoena to produce documents as originally ordered in 2013, the Court began by noting that it applies an abuse of discretion standard in reviewing district court decisions resolving applications for assistance pursuant to Section 1782. It also stated that it applies an abuse of discretion standard in reviewing decisions to hold a party in civil contempt and to impose compensatory and coercive sanctions.

Dalton stated: “A district court abuses its discretion if it applies an incorrect legal standard, applies the law in an unreasonable or incorrect manner, follows improper procedures in making a determination, or makes findings of fact that are clearly erroneous.”

He went on to state that, “Section 1782 is the product of congressional efforts, over [a] span of nearly 150 years, to provide federal-court assistance in gathering evidence for use in foreign tribunals [as evidenced in the U.S. Supreme Court’s decision in] Intel Corp. v. Advanced Micro Devices, Inc. …”

Further, Dalton added, referencing section 1782 itself, that it currently provides: “The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal …. The order may be made … upon the application of any interested person and may direct that the testimony or statement be given, or the document or other thing be produced, before a person appointed by the court. … To the extent that the order does not prescribe otherwise, the testimony or statement shall be taken, and the document or other thing produced, in accordance with the Federal Rules of Civil Procedure.” It should be noted that examined in context, the statutory language “authorizes, but does not require,” that district courts provide judicial assistance to sec. 1782 applicants.”

The court identified four prima facie requirements that must be established before a district court may exercise its authority under Sec. 1782: (1) the request must be made “by a foreign or international tribunal,” or by “any interested person”; (2) the request must seek evidence, whether it be the “testimony or statement” of a person or the production of “a document or other thing”; (3) the evidence must be “for use in a proceeding in a foreign or international tribunal”; and (4) the person from whom discovery is sought must reside or be found in the district of the district court ruling on the application for assistance.

Dalton noted, “If these requirements are met, then – upon consideration of four factors identified by the Supreme Court (“Intel Factors”) – the district court has discretion whether and how to grant an applicant’s sec. 1782 request.”

He added, “The Intel Factors consider: (a) whether aid is sought to obtain discovery from a participant in the foreign proceeding..; (b) “the nature of the foreign tribunal, the character of the proceedings underway abroad, and the receptivity of the foreign government or the court or agency abroad to U.S. federal-court judicial assistance..; (c) whether the applicant is attempting to use sec. 1782 to “circumvent foreign proof-gathering restrictions or other policies of a foreign country or the United States.; and (d) whether the discovery requests are “unduly intrusive or burdensome…”

The court noted that Trident Atlanta argued that Sec. 1782 does not reach “documents located in foreign countries” because “American courts were not intended to serve as clearing houses for requests for information from courts and litigants all over the world.”

The Court referenced this as the extraterritoriality argument. It further noted that Anna countered that the extraterritoriality argument fails under Intel Corp. and a plain reading of Sec. 1782.

Dalton continued by pointing out that: “The Extraterritoriality Argument presents a question of first impression in this Circuit. With no controlling law on point and a dearth of instructive decisions from our sister Circuit Courts, the District Court rejected the Extraterritoriality Argument. This decision – to the extent it is based on the District Court’s construction of sec. 1782 or the Federal Rules of Civil Procedure – is reviewed de novo.”

The Eleventh Circuit thus decided to look at the entire issue anew because the lower District Court’s rejection of the extraterritoriality argument was not based on any precedential decisions handed down either in that Circuit or any other Circuit. In doing so, Dalton pointed out that the District Court properly began its analysis with an examination of the statutory text. The District Court noted that Sec. 1782 “plainly says that discovery is to be produced pursuant to the Federal Rules of Civil Procedure unless otherwise limited” by court order. The District Court noted that the Federal Rules of Civil Procedure “authorize extraterritorial document productions.” Thus, the District Court concluded that sec. 1782 authorized it to require that Trident Atlanta produce documents in its “possession, custody, and control,” even if such documents are in the possession of one of the Bahamian Trident Trust companies.

The court then discussed Trident Atlanta’s argument: “Seeking reversal of this determination, Trident Atlanta urges us to consult “the legislative history and principal drafter” of sec. 1782 and apply a “presumption that [U.S.] law governs domestically but does not rule the world.” The court declined to adopt such a provincial view given that the statutory text authorizes production of documents “in accordance with the Federal Rules of Civil Procedure.”

Dalton added that discovery pursuant to the Federal Rules of Civil Procedure is broad and covers materials located outside of the United States. Further, the court noted that: “(1) Federal Rule of Civil Procedure 45 requires that subpoenaed parties “produce designated documents, electronically stored information, or tangible things in [the parties’] possession, custody, or control..; and (2) the only geographical limitation provided by Rule 45 concerns the location for the act of production – not the location of the documents or information to be produced…”

The court was therefore of the view that “the District Court could require that Trident Atlanta [to] produce responsive documents and information located outside the United States – so long as Trident Atlanta had possession, custody, or control of such responsive material (Control Requirement).”

Dalton stated that the Eleventh Circuit agreed with the District Court that “the location of responsive documents and electronically stored information – to the extent a physical location can be discerned in this digital age – does not establish a per se bar to discovery under sec. 1782. To hold otherwise he added would categorically restrict the discretion Congress afforded federal courts to allow discovery under sec. 1782 “in accordance with the Federal Rules of Civil Procedure…This, we cannot do.”

Having rejected the extraterritoriality argument, the Eleventh Circuit then proceeded to discuss the issue of control which Trident Atlanta raised in its appeals.

The Eleventh Circuit opined that the District Court applied the correct legal standard with regards to the issue of control. The court construed “control” for purposes of discovery as “the legal right to obtain the documents requested upon demand.” It noted that the District Court determined that “the legal right to obtain documents requested upon demand” may be established where affiliated corporate entities—who claim to be providers of complimentary and international financial services—have actually shared responsive information and documents in the normal course of their business dealings.

The court also rejected Trident Atlanta’s argument that the District Court’s factual findings were erroneous. It noted that the record included a copy of correspondence authored by Ms. Pugh that appeared to show Mikhail’s beneficial ownership of Tripleton in March 2012, and Trident Atlanta admitted that Trident Bahamas actually provided Ms. Pugh with corporate information concerning Tripleton. Trident Atlanta also conceded that: (a) it and Trident Bahamas are members of a group – the “Trident Group” – which offers clients “international financial planning services” through “production” and “client liaison” companies around the world; (b) production companies in the Trident Group refer client requests to client liaison companies for communication purposes; (c) it is a client liaison company; and (d) Trident Bahamas is a production company.

Dalton in giving the decision wrote: “Although Trident Atlanta denied having any ‘legal right’ to documents or information from other members of the Trident Group, it is apparent that client liaison members could not possibly perform their intended functions for Trident Group clients absent the ability to obtain information and documents from production company members.

Thus, we agree with the District Court that significant ‘circumstantial evidence’ established that Trident Atlanta had ‘control’ over responsive documents in the physical possession or custody of Trident Bahamas.”

As a consequence, the Eleventh Circuit affirmed the District Court’s decision in the first appeal.

With regards to the second appeal pertaining to the sanctions imposed on Trident Atlanta, the Court noted that Trident Atlanta “was afforded ample opportunity to show cause [reason] why it should not be held in contempt and sanctioned …. This fulsome record evinced clear and convincing violations of the District Court’s many orders, which violations complimented discovery-avoidance efforts in other jurisdictions, exerted sometimes by shared counsel – on behalf of [Mikhail], Tripleton, Trident Bahamas and other members of the Trident Group.

Further, Trident Atlanta did not establish that these violations occurred despite ‘all reasonable efforts to comply’ with good faith with the District Court’s orders ….”

Analysis

I found the court’s reasoning to be clear and logical, despite my concerns about the U.S.’s well-documented and long criticized penchant for making extraterritorial decisions. In this case the court, both at District and Circuit levels, was correct in how it interpreted the scope of section 1782 and how it applied that to the particular circumstances it faced here. The issue was whether section 1782 could be used to secure documents for use in a foreign proceeding and the Eleventh Circuit said yes once certain conditions or factors originally set out in the Intel Corp case were met.

The issue of sanctions against Trident Atlanta also appeared fair given the extent to which Mikhail sought to avoid discovery not only in the U.S. but in several parts of the world using a network of lawyers. What is curious is why Trident assisted Mikhail in his efforts to hide assets from his wife? Trident’s actions, on the surface alone, beg for clarification. It appears that it must have had a very strong incentive and reason to have battled so long and hard to hide this information and in effect absorb massive financial sanctions from a U.S. Federal Court.

This case is further support for an argument I have been making about the dangers of using high-profile, multi-jurisdictional corporate/trust and other service providers which have a U.S. connection. Firstly, they tend to be more susceptible to hacking, a la Mossack and Fonseca and the Panama Papers data leaks of earlier this year. Such institutions are high profile, well-known and likely have a centralized system for maintaining client files. Of course, Mossack Fonseca learnt the dangers of the hard way. Secondly, these firms often have physical offices on U.S. soil. Thus, they are subject to U.S. courts and anyone, once they meet the criteria set out above to qualify for making a section 1782 application, can secure information on clients and companies anywhere in the world.

What also is worrisome is the potential conflict that would arise if the ability of Trident Atlanta to get information from Trident Bahamas were hampered by laws in the Bahamas that would make divulging such information to Trident Atlanta a criminal offense? Under the laws of Anguilla, divulging client information outside of the legal framework allowed for under Anguillian law, would be a breach of our Confidential Relationships Act, R.S.A. c.C85. While recent amendments to that Act allow for exceptions to be made to permit institutions to divulge client information, complying with the order of a foreign court, whether in the U.S. or elsewhere outside of Anguilla, is not one of them.

In a scenario where Trident Anguilla existed and the information was held in that entity, Trident as a group and Trident Atlanta would be in a very precarious situation. On one hand, Trident Atlanta would not be able to deny the existence of Trident Anguilla and the control issue could not be avoided. I suppose that under such circumstances, Trident Atlanta could argue that to divulge the information would place Trident Anguilla in legal jeopardy and cause that company to breach Anguillian law. It would also expose Trident Anguilla to legal action by Mikhail.

However, in the reconsideration order, the District Court spoke of Trident Atlanta’s need to make a good faith effort to find the documents, as well as Trident Atlanta’s practicable ability to secure them. It would be interesting to see if an argument by Trident Atlanta that its practicability to secure the documents was negated by the fact that to do so would place Trident Anguilla at risk of legal action, would persuade a U.S. court to accept such an explanation and suffice to prevent said court from imposing sanctions on Trident Atlanta.

However, something tells me that a U.S. court would not find such convincing and Trident as a group would find itself between the devil and the deep blue sea.

Conclusion

In a world of data leaks, low margins, increased compliance costs, and now the unknown policies of President Trump, the life of a corporate/trust service provider is difficult enough and becoming more so. To now know that a U.S. court won’t hesitate to demand information via a U.S.-affiliated company, is just one more thing to be worried and concerned about. The court made it clear that the physical location, to the extent that such exists in today’s world where documents are held electronically, will not be a bar to the exercise of its power to order production of said documents. This is very instructive given the age in which we live and all IFC players including and especially clients, should be very cognizant of this.

Carlyle K Rogers MBA, LLM is a barrister-at-law in Anguilla who practices in the areas of corporate and financial services law. He is also admitted in the BVI and New Zealand, owns and manages the Stafford Group of Companies. He studied law in London at Queen Mary and Westfield College, University of London, where he obtained an LLB (Hons) degree in 2001 and with the University of London (International Programme) from which he obtained an LLM degree in Corporate and Commercial Law in 2005. He completed the Legal Education Certificate (LEC) at the Hugh Wooding Law School in Trinidad in March 2013 and was admitted as a barrister of the Eastern Caribbean Supreme Court in Anguilla and BVI in 2013.